IBM AI software risk limited to 2%, Krishna tells investors

IBM AI software risk is confined to a small slice of the company’s portfolio, CEO Arvind Krishna told CNBC, saying applications built with artificial intelligence models could replace about 2% of IBM’s software. The remarks came after second-quarter results showed pressure in the mainframe-linked business, while IBM shares have fallen about 30% this year.

Krishna used an interview on CNBC’s “Squawk on the Street” to draw a line between application software that may be vulnerable to AI and infrastructure software that IBM says supports customers’ AI adoption. He said most of IBM’s software helps clients prepare data in real time, lower the cost and complexity of managing it, and operate across hybrid infrastructure.

Investor concern has increased across the software sector as AI tools from companies including Anthropic and OpenAI grow more capable. CNBC reported that the iShares Expanded Tech-Software Sector ETF, known by its ticker IGV, is down 17%.

How much of IBM software could AI replace?

Krishna told CNBC that AI-built applications could replace only 2% of IBM’s software. He said software used as infrastructure, rather than end-user applications, should be helped by corporate AI spending because clients need systems to manage data and hybrid computing environments.

IBM faced a sharp market reaction earlier this year after Anthropic published a blog post about Claude Code’s ability to modernize Cobol code, a programming language often used on mainframes. CNBC reported that IBM shares dropped 13% in February following that post.

The latest concern is tied less to a direct AI substitution and more to spending priorities inside customer data centers. Krishna told analysts after the earnings report that IBM’s current z17 mainframe generation had a difficult quarter. Chief Financial Officer Jim Kavanaugh said some customers chose to allocate spending to servers and storage instead of mainframe computers, as memory prices increased because of AI chip requirements.

Why does mainframe demand affect IBM software?

IBM’s mainframe business carries a software multiplier. CNBC reported that IBM generates $3 of software revenue for each $1 of mainframe infrastructure revenue, so weaker hardware sales can reduce related software demand.

That link showed up in the quarter. IBM’s Z mainframe revenue fell 42%, and transaction processing software revenue declined 9%. The drop marked a reversal from the first quarter, when Z revenue rose 48% and transaction processing software increased 2%.

Software remains central to IBM’s earnings profile. CNBC reported that software accounted for 45% of IBM revenue in the June quarter and carries the company’s strongest profit margins.

Krishna cited Starbucks as an example of the application software risk he sees within the 2% exposure. He said Starbucks spends about $2 million a year on IBM software and is removing Tririga lease management software, a product IBM acquired in 2011 and plans to stop supporting in 2027. Krishna said software of that kind is exposed to risk, adding that Starbucks had been using a decade-old product.

IBM maintained its forecast for a $1 billion increase in free cash flow in 2026. Kavanaugh, however, said Wednesday that he now expects software revenue to grow 6% to 8% this year, after saying in January that he was confident the growth rate would be in the double digits.

Krishna told CNBC that mainframe hardware capacity is increasing and that related software sales tend to follow hardware with a lag. He said roughly 75% of deals that slipped out of the second quarter should return to IBM before year-end.

Jefferies analysts wrote Thursday that they would avoid giving IBM full credit for maintaining its guidance until more of the delayed activity appears in reported results. CNBC reported that the firm recommends buying IBM shares.

This story draws on original reporting from CNBC.